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In brief
- The awaited Federal Reserve interest rate cut of 0.5% took centre stage.
- Geopolitical risk heightened in the middle east, but has the market ignored it so far?
- China announces a stimulus package aimed at driving economic growth and boosting consumer confidence.
September in review
Historical patterns, whilst not always repeated exactly, tend to occur more frequently than we like to admit. This can also be true of moves in share prices within financial markets. We as investors tend to look for trends in markets and similarities between one year to the next. The good news for September was that the tendency for January and September to be the weakest months of the year for stock market returns, did not occur this time with financial markets being marginally positive after a negative start to the month.
The trigger for this better-than-expected outcome, was the first cut in interest rates by the US Federal Reserve following a period of hikes since the end of 2022. As a fillip to markets, they were cheered by the 0.50% cut, a bigger reduction than the more incremental cuts of 0.25% so far delivered by the UK and European Central Banks.
The US Central Bank had room to cut interest rates given their keenness to avoid too sharp a slowing in the US jobs market, balanced with a slew of economic data including retail sales and inflation. This led to a maintained positivity about the state of the US economy, without signalling that it was overheating.
Global equities rallied across the month, demonstrated by a +1.92% increase by the FTSE All-World Index (local currency), with an enormous move in China, the FTSE China Index rose 22.0% in sterling terms. The market move was spurred by Xi Jinping, the Chinese President and his Central Bank Governor, announcing a significant fiscal and monetary boost to try to stimulate economic growth to get the Chinese economy back on track to the 5% Gross Domestic Product (GDP) growth target in the last quarter. This announcement included interest rate cuts, lowering deposit payments for second homes and a reduction in bank reserve requirements which encourages greater lending and credit growth within the economy. Yet, it was the stock market initiatives which had a material impact on markets. Funding was made available that allowed companies to buy their own shares. With a new cohort of buyers, this saw a rally in Chinese equities as a result.
China
China has been one of the worst performing equity markets over the last three years, as international investors retreated from the market over concerns of the weak economy and fears about the political and regulatory interference conducted on some high-profile companies. Even after the bounce this month, the Chinese market remains down -16% (the FTSE China Index) over three years in sterling terms. A big headwind currently is the uncertainty around tariffs under a new US government. The recent policy announcements might have started to turn momentum but metaphorically speaking China is an oil tanker and will need continued momentum to get out of the difficult situation it finds itself in. We do however take a number of positives from these recent initiatives and from a valuation perspective we believe it is a very attractive region.
Fixed Income
In fixed income markets, the fall in government bond yields (prices rose), led to fixed income across the spectrum having a positive month. Government bonds benefitted from interest rate cuts, with buyers looking for attractive yields. Alongside this, higher quality corporate debt and higher yielding bonds benefitted from falling default expectations.
Gold
In other markets, Gold continues to rally, up over +3.5% in the month and 20.9% year-to-date. Buying has been driven from several sources this year. Chinese consumers investing instead of buying property is one reason, but also some investors hedging inflation risks that remain in the pipeline, while elevated geopolitical risk is supportive too. There may be further signs that investors are taking risk off the table after a good run-in markets, with gold providing an element of diversification.
Whilst the mild rally across asset classes has been a positive, it’s the geopolitical backdrop at the end of the month, specifically in the middle east, which has worried some investors. The conflict appears to be going into a new phase as we write, with Iran launching a strike on Israel, and a clear emphasis on a direct response from Israel being a fear. Whilst this could give food for thought for markets, it’s worth noting that geopolitics can destabilise markets for short periods of time, but rarely has a lasting consequence. At this point oil prices have ticked up a little, but equities have shrugged it off. The middle east is extremely sensitive to movements in the oil price, unlike the likes of Russia/Ukraine where food as well as energy prices were impacted. Whilst we hope that there is not further escalation, there is a risk that in this volatile region, things could get worse before they get better.
Key positioning
- The portfolios’ investments in emerging market equities has benefited from the rally in China and Asia-pacific ex Japan. The funds with active managers that are held in the Blend portfolios have a higher exposure to China which can benefit performance.
- With a large holding in corporate fixed income, the rally in bonds will have fed through to the portfolios, which benefited from their yield and price rise.
- Mid-sized UK companies were the best performing of all UK equities and where we have a reasonable exposure.
- We remain positive on the UK considering the positive economic backdrop relative to Europe.
- We are cautious on the valuations of the largest US companies.
